Multilateral Parametric Climate Risk Insurance: a Tool to Facilitate Agreement About Deployment of Solar Geoengineering? Joshua B
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CLIMATE POLICY https://doi.org/10.1080/14693062.2019.1607716 OUTLOOK ARTICLE Multilateral parametric climate risk insurance: a tool to facilitate agreement about deployment of solar geoengineering? Joshua B. Hortona and David W. Keithb aJohn A. Paulson School of Engineering and Applied Sciences (SEAS), Harvard University, Cambridge, MA, USA; bJohn A. Paulson School of Engineering and Applied Sciences (SEAS), Harvard Kennedy School, Harvard University, Cambridge, MA, USA ABSTRACT ARTICLE HISTORY States will disagree about deployment of solar geoengineering, technologies that Received 7 January 2019 would reflect a small portion of incoming sunlight to reduce risks of climate Accepted 8 April 2019 change, and most disagreements will be grounded in conflicting interests. States KEYWORDS that object to deployment will have many options to oppose it, so states favouring Solar geoengineering; deployment will have a powerful incentive to meet their objections. Objections insurance and risk; policy rooted in opposition to the anticipated unequal consequences of deployment may interactions / integration be met through compensation, yet climate policy is inhospitable to compensation via liability. We propose that multilateral parametric climate risk insurance might be a useful tool to facilitate agreement on solar geoengineering deployment. With parametric insurance, predetermined payouts are triggered when climate indices deviate from set ranges. We suggest that states favouring deployment could underwrite reduced-rate parametric climate insurance. This mechanism would be particularly suited to resolving disagreements based on divergent judgments about the outcomes of proposed implementation. This would be especially relevant in cases where disagreements are rooted in varying levels of trust in climate model predictions of solar geoengineering effectiveness and risks. Negotiations over the pricing and terms of a parametric risk pool would make divergent judgments explicit and quantitative. Reduced-rate insurance would provide a way for states that favour implementation to demonstrate their confidence in solar geoengineering by underwriting risk transfer and ensuring compensation without the need for attribution. This would offer a powerful incentive for states opposing implementation to moderate their opposition. Key policy insights . States favouring deployment of solar geoengineering will need to address other states’ objections—unilateralism is implausible in practice . This might be partially achieved using parametric climate risk insurance based on objective indicators . A sovereign risk pool offering reduced-rate parametric insurance underwritten by states backing deployment could facilitate cooperation on solar geoengineering deployment . States favouring deployment would demonstrate their confidence in solar geoengineering by supporting the risk pool . Opposing states would be insured against solar geoengineering risks and proposing states would be incentivized to guard against overconfidence Introduction Solar geoengineering1 is a controversial technology and states will disagree about its deployment. The possibly unequal distribution of benefits, costs, and risks arising from deployment is likely to be a key source of CONTACT Joshua B. Horton [email protected] John A. Paulson School of Engineering and Applied Sciences (SEAS), Harvard University, 12 Oxford Street, Link Rm. 276, Cambridge, MA 02138 © 2019 Informa UK Limited, trading as Taylor & Francis Group 2 J.B.HORTONANDD.W.KEITH disagreement. Suppose a state, or group of states, wishes to deploy solar geoengineering while other states oppose deployment. How might states favouring deployment (‘proposing states’) persuade states opposed to deployment (‘opposing states’) to reduce their opposition? The latter might reasonably demand that propos- ing states accept liability for harms or offer some measure of credible compensation. Here we suggest that para- metric insurance, or insurance with payouts tied to objective indices, might be employed as an instrument to ease disagreement between states over deployment of solar geoengineering.2 Solar geoengineering is the idea that humans might deliberately alter the Earth’s radiative balance to offset some of the radiative forcing caused by long-lived greenhouse gases (GHGs), with the goal of temporarily redu- cing climatic changes for a given level of GHG forcing. Methods of solar geoengineering include dispersal of aerosols into the stratosphere, in order to reflect a small amount of incoming sunlight back to space to offset some of the warming caused by GHGs. Other methods include cirrus cloud thinning, aimed at allowing more heat to escape the atmosphere. Our article is structured as follows. We first provide a summary of solar geoengineering. We then describe the growth of interest in parametric, or index-based, climate insurance. Third, we describe two main reasons that states might oppose deployment of solar geoengineering. Fourth, we review constraints on unilateral action and the consequent need for international cooperation if deployment is to be stable. With these preliminaries out of the way, we then describe a simple proposal, based on existing parametric insurance schemes, with the potential to facilitate agreement between states over deployment of solar geoengineering. Finally, we reflect on the limitations of this proposal in light of the complex reality of international politics. Solar geoengineering Scientific knowledge about solar geoengineering remains limited. The proposed technologies have not yet been developed, and debates over their legal, political, and ethical implications, as well as their costs, are at an early stage. However, evidence from climate models strongly suggests that solar geoengineering has the potential to significantly reduce various impacts of climate change (Kravitz et al., 2014; Moreno-Cruz, Ricke, & Keith, 2012; National Research Council, 2015). Reflecting sunlight is not equivalent to reducing atmospheric concentrations of GHGs, so any method of solar geoengineering will produce a regional redistribution of climate benefits and risks that differs from a world without it. Predicting the effects of solar geoengineering is inherently uncertain. In the cases where solar geoengineer- ing is applied roughly uniformly on a global basis, which is most plausible for stratospheric aerosols, the cli- mate’s response, and the uncertainty in that response, is intimately tied to uncertainty in predicting the climate response to GHGs (Ricke, Rowlands, Ingram, Keith, & Morgan, 2012). Further, any method of achieving solar geoengineering will involve risks that will be unequally distributed. The risks of solar geoengineering fall into two broad categories: first, the side effects of the method used, such as air pollution or ozone loss; and second, ‘substitution risks’ arising from the imperfect substitution of solar geoengineering for mitigation to achieve a given reduction in radiative forcing. Regional hydrological changes resulting in floods and droughts are an example of the latter category. These are perhaps the most widely discussed concerns about the climate impacts of solar geoengineering, though the evidence to support these concerns is weak in cases where solar geoengineering is applied roughly uniformly (Irvine et al., 2019; Kravitz et al., 2013). Parametric climate insurance Over the last decade, parametric insurance has emerged as a novel form of climate risk management. It has been developed and promoted primarily by the disaster risk management community, led by the World Bank, for whom it has been viewed as an innovative instrument with the potential to help poor and vulnerable house- holds, communities, and countries respond better to the prospect and occurrence of extreme events (World Bank, 2017). Parametric, or index-based, insurance relies on the use of objective environmental indices to protect policyholders from financial loss: if the value of a specific, spatially fixed indicator reaches certain pre- defined levels, payouts which vary according to previously agreed index-based formulas are automatically CLIMATE POLICY 3 triggered to compensate injured parties for damages they are assumed to have suffered (Linnerooth-Bayer & Hochrainer-Stigler, 2015). Traditional loss assessment plays no role, resulting in lower transaction costs but also in ‘basis risk,’ or the possibility that an index fails to sufficiently reflect actual damages causing real losses to go uncompensated. Parametric insurance initially took the form of weather derivatives offered by private insurers to protect against crop losses in industrialized countries. The disaster risk community adopted the approach and pioneered a set of small-scale rainfall-based crop insurance programmes intended to bolster the resilience of developing country farmers by protecting them against weather shocks. Such schemes have since multiplied and evolved. Today, three intergovernmental climate risk insurance (CRI) schemes based on indexed disbursement are oper- ated by vulnerable states (backed by private reinsurers) in the Caribbean, Africa, and the Pacific to protect them- selves against extreme events like tropical cyclones. These multilateral schemes are steadily expanding in terms of membership (a total 59 sovereign states currently belong to the three risk pools) and available coverage. Payouts in the Caribbean were $61.4 million3 in 2017. Parametric insurance, including arrangements among states, is now central in discussions of loss and damage from